Mar­kets gone awry strain re­tire­ment plan­ning

The Bradenton Herald (Sunday) - - News - BY TARA SIEGEL BERNARD

You’ve heard it be­fore: When the mar­kets be­come er­ratic, or seem poised for a pro­longed down­turn, the best thing you can do is noth­ing at all.

But if you are on the cusp of re­tire­ment – or, per­haps worse, newly re­tired – a tur­bu­lent stock mar­ket can make you feel par­tic­u­larly vul­ner­a­ble.

While there is some va­lid­ity to those feel­ings, it’s more pro­duc­tive to re­di­rect any panic into pru­dence, which will help en­sure your money lasts longer.

For older peo­ple in­vested in stocks, the per­for­mance of the mar­ket in the early years of your re­tire­ment can have a last­ing ef­fect on your port­fo­lio, which will re­main a dy­namic en­tity for per­haps three more decades. If you have to start sell­ing in­vest­ments when they are worth less, you'll have to sell more shares to get the cash you need – and the reper­cus­sions build on them­selves.

“That can re­ally start dig­ging a hole in your port­fo­lio that be­comes harder to dig out of,” said Wade Pfau, pro­fes­sor of re­tire­ment in­come at the Amer­i­can Col­lege for Fi­nan­cial Ser­vices. “It is re­ally the first 10 years of the mar­ket per­for­mance in re­tire­ment that are go­ing to drive your out­come.”

While the S&P 500 lost 6.2 per­cent last year, the fi­nal three months of the year were es­pe­cially volatile. It’s un­clear where the mar­ket will go to­mor­row, or the next decade. But whether you’re get­ting close to re­tire­ment or just start­ing to work, part of your fi­nan­cial suc­cess is a mat­ter of chance: The growth of your port­fo­lio is largely de­ter­mined by when you started in­vest­ing and when you re­tire.

Let’s say a per­son saved 15 per­cent of her earn­ings – a flat salary that grew with in­fla­tion – dur­ing a 30-year ca­reer. If that per­son re­tired in 1982, she would have ac­cu­mu­lated just over five times her fi­nal salary. If she re­tired in 2000, how­ever, she would have amassed 17 times her salary.

The same type of vari­abil­ity can oc­cur based on the se­quence of your mar­ket re­turns in re­tire­ment – ex­cept it’s am­pli­fied be­cause in­stead of adding to the money you’ve in­vested, you’re spend­ing it.

Here are some other steps re­tirees can take to lengthen the life of their sav­ings when mar­kets are less than co­op­er­a­tive: Port­fo­lio check: Re­tirees need to ask them­selves a cou­ple of key ques­tions. Is my port­fo­lio broadly di­ver­si­fied in low-cost in­vest­ments, such as in­dex funds? Is my al­lo­ca­tion to stocks more than my stom­ach can han­dle should the mar­ket plum­met 50 per­cent, as it did in 2008 and 2009?

If you an­swer “no” to these ques­tions, you should re­assess (prefer­ably with a pro) how re­duc­ing your stock ex­po­sure might change your abil­ity to spend what you want in re­tire­ment.

Mind­ful spend­ing: One of the most widely cited rules for re­tire­ment spend­ing might be what’s known as the 4 per­cent rule. It sug­gests that re­tirees who with­drew 4 per­cent of their ini­tial re­tire­ment port­fo­lio bal­ance, and then ad­justed that dol­lar amount for in­fla­tion each year there- af­ter, would have cre­ated a pay­check that lasted for 30 years. (The num­bers crunched by a fi­nan­cial plan­ner more than two decades ago were based on a port­fo­lio evenly split be­tween stock and bonds.)

But if your port­fo­lio value takes a sig­nif­i­cant hit, your with­drawal rate may have to in­crease to sup­port your spend­ing. If that rate starts to ap­proach 5 per­cent, and cer­tainly 6 per­cent, there’s a greater chance you'll out­live your port­fo­lio, Pfau warned. So ad­just­ments may be in or­der.

The sim­plest way to deal with a dip would be to hold your spend­ing steady, rather than in­creas­ing it with in­fla­tion. That ap­proach can be enough to steady your fi­nances even if your port­fo­lio were to drop by 25 per­cent from its orig­i­nal value at re­tire­ment, ac­cord­ing to Ju­dith Ward, a se­nior fi­nan­cial plan­ner with T. Rowe

Price, based on a re­cent study. She sug­gested to keep spend­ing steady for two to four years, de­pend­ing on when the port­fo­lio re­bounds.

Cre­ate a smoother ride: Tra­di­tion­ally, in­vestors re­duce their ex­po­sure to stocks as they ap­proach re­tire­ment. But one novel ap­proach is to cut that ex­po­sure even fur­ther – then get back into the mar­ket as you age.

This strat­egy, stud­ied by Pfau and Michael Kitces, di­rec­tor of wealth man­age­ment at Pin­na­cle Ad­vi­sory, is to in­crease your stock hold­ings over time. Port­fo­lios that started with about 20 to 40 per­cent in stocks at re­tire­ment, and then grad­u­ally in­creased to about 50 or 60 per­cent, lasted longer than those with static mixes or those that shed stocks, ac­cord­ing to their anal­y­sis.

Hold cash re­serves: If you’re ap­proach­ing re­tire­ment and wor­ried about a sig­nif­i­cant mar­ket cor­rec­tion, there’s an­other strat­egy that might pro­vide some peace of mind: Keep up to two years of ba­sic liv­ing ex­penses in cash to cover, say, the costs of hous­ing, food and other es­sen­tials. With that sort of buf­fer, you can try to avoid tap­ping your in­vest­ment port­fo­lio for a while, giv­ing it some time to re­cover.

Putting too much money in cash, how­ever, may weaken over­all re­turns be­cause you will have less in­vested to be­gin with, and there­fore less to build on. Look for higher re­turns: This does not in­volve chas­ing af­ter some hot stock or grow­ing sec­tor. It’s far more bor­ing and coun­ter­in­tu­itive, but guar­an­teed to de­liver a higher pay­check in re­tire­ment over the long run: De­lay So­cial Se­cu­rity as long as you rea­son­ably can.

“The ef­fec­tive re­turn of de­lay­ing So­cial Se­cu­rity is much higher than what you will earn in the mar­ket to­day,” said David Blanchett, head of re­tire­ment re­search for Morn­ingstar. “It is like a 10 per­cent guar­an­teed re­turn.”

Your ben­e­fits gen­er­ally rise by 8 per­cent for each year you wait to col­lect the check be­yond your “full re­tire­ment age” – that is, the age you’re el­i­gi­ble for a full ben­e­fit, which is cur­rently 66 years and 2 months for peo­ple born in 1955.

Some­one set to re­ceive a full ben­e­fit of $1,413 monthly (the av­er­age ben­e­fit amount), who in­stead waited two more years, would re­ceive roughly $1,640 – an amount that would rise with in­fla­tion.

A year ago, Jeromy Gavi­ola was strug­gling to find steady and mean­ing­ful work in San Fran­cisco. Liv­ing in the work­ing-class neigh­bor­hood of Hunters Point, he heard about a pro­gram that was train­ing peo­ple to build the Chase Cen­ter, the $1 bil­lion, 18,000-seat arena in Mis­sion Bay that will be the Golden State War­riors’ home when this fall.

Gavi­ola, 33, ap­plied to

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